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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI KULDIP SINGH, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLEShri Meet Shah Shri Hoshang B. Irani
IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI KULDIP SINGH, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 7675/MUM/2019 (A.Y: 2016-17) ACIT-13(3)(2) v. M/s. Zelle Biotechnology Pvt. Ltd., Room No. 229/219, 2nd Floor 110, Udyog Bhavan Aayakar Bhavan, M.K. Road Sonawala Road, Goregaon (E) Mumbai - 400020 Mumbai – 400063 PAN: AAACZ2106R (Appellant) (Respondent) Assessee by : Shri Meet Shah Department by : Shri Hoshang B. Irani
Date of Hearing : 29.06.2022 Date of Pronouncement : 27.07.2022
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the Revenue against order of the Learned Commissioner of Income Tax (Appeals)-21, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 30.09.2019 for the A.Y.2016-17.
Brief facts of the case are, assessee filed its original return of income for the A.Y. 2016-17 declaring the income at ₹.2,44,36,900/- on
2 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., 15.10.2016. Subsequently assessee revised the return of income on 20.02.2017 and declared loss at ₹.2,16,68,837/-, the reason for filing of revised return of income is on account of merger of M/s.J.S. Chemi Equipment Pvt. Ltd., (for short “JSCEPL”), as per the direction of Hon'ble High Court order dated 27.10.2016 permitting merger of the company with retrospective effect from 01.10.2015. In the revised return of income assessee gave the effect of amalgamation whereby the books of both companies are merged and income is consolidated in the computation of total income. The Assessing Officer considered the revised return of income for completing he assessment u/s. 143(3) of the Act. The case was selected for scrutiny through CASS and notice u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee. In response AR of the assessee attended and submitted the information as called for.
During the assessment proceedings Assessing Officer observed that assessee has recorded the difference amount of ₹.18,50,95,050/- arising because of recording of net assets and the purchase value of equity shares of JSCEPL. The Difference in the purchase value of equity shares and acquisition of net assets were transferred to goodwill account. Accordingly, assessee has claimed depreciation @25% which worked out
3 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., to ₹.4,62,73,763/- as depreciation for the year. The Assessing Officer observed that there is no goodwill existed in the books of JSCEPL, therefore he issued show cause notice asking the assessee to explain the claim of depreciation.
In response, assessee submitted that as per AS-14 the assets of the merging company have to be accounted for by the assessee at its book value so the amount paid for the cost of acquiring shares of JSCEPL which was much more is to be treated as goodwill in the books of accounts. The amount paid for purchase of shares or goodwill paid for acquiring the net assets of the company (JSCPL). So the difference in the purchase price of shares and value of assets has to be recorded in books is the goodwill amount paid for the business and further, assessee relied on CIT v. SMIFS Securities Limited [348 ITR 302], Jeypore Sugar Co. Ltd. v. ACIT [(2011) 44 SOT 625].
After considering the submissions of the assessee Assessing Officer rejected the claim of the assessee, the Assessing Officer proceeded to disallow the claim of the assessee of the depreciation on goodwill with the following observations: -
4 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., (i). the goodwill has not been purchased or acquired by incurring any expenditure. (ii). the goodwill is not an asset which is eligible for depreciation u/s 32 (iii). Hon'ble Apex Court's judgement in the case of Smifs Securities Ltd does not apply to the appellant's case since the case is related to depreciation on membership card of stock exchange.
Accordingly, he disallowed the depreciation on goodwill. Aggrieved assessee preferred an appeal before the CIT(A) and before the Ld.CIT(A) assessee filed detailed submissions in this regard. After considering the detailed submissions of the assessee Ld.CIT(A) observed that the Hon'ble Supreme Court in the case of CIT v. SMIFS Securities Limited (supra) has dealt with this issue elaborately and came to the conclusion that excess consideration paid over the net assets value of the business acquired shall be goodwill being any other business or commercial rights of similar nature and will be entitled for depreciation u/s. 32 of the Act and further, it elaborately discussed Explanation 3 to section 32(1) of the Act. Their order wherein they gave a clear finding that the expression any other business or commercial rights of a similar nature contained in Explanation 3 indicates that goodwill would fall under this category. The Ld.CIT(A) gave relief to the assessee by relying on the following decisions: -
“1. Delhi High Court in the case of Triune Energy Services Private Limited v. DCIT 237 Taxman 230
5 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., 2. ITAT, Mumbai in the case of Gea Process Engineering (India) Vs ITO dated 03.01.2019 ITA no 4154 & 4337/Mum/2015. 3. ITAT, Mumbai in the case of DCIT v. Toyo Engineering India Limited in ITA no. 3279/Mum/2008, order dated 13.10.2014. 4. ITAT, Chennai in the case of Hinduja Foundries limited v. ACIT 178 TTJ 88(Chennai-trib.).”
Further, Ld.CIT(A) observed as under: - “The courts/tribunal in the aforesaid decisions have taken a consistent stand of allowing depreciation on Goodwill being excess of consideration paid over and above net asset value. Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression "goodwill" subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. At this stage, it is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under: - "Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business is acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess is termed as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise." In view of the aforesaid discussions and following the judgement of Hon'ble Supreme Court in the case of Smifs Securities Limited (Supra). I am of the considered view that depreciation of Rs.4,62,73,763/- claimed on goodwill deserves to be allowed. The AO is accordingly directed to delete the said addition made to the total income of the appellant during the year. This ground of appeal is therefore allowed.”
6 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., 8. Aggrieved with the above order, Revenue is in appeal before us raising following grounds in its appeal: -
"On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 4,62,73,763/- without appreciating the fact that the ratio of judgement of Hon'ble S.C. in the case of Smiff Securities Ltd is not applicable in the facts and circumstances of this case as the Hon'ble SC has dealt with only the allowability of depreciation of goodwill but had no occasion to adjudicate upon the matter of value assigned to the goodwill and the method of computation of goodwill." 2. "On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 4,62,73,763/- without appreciating the Explanation 7 of section 43(1) and Explanation 2 to section 43(6)(c) of the I.T. Act. The Act clearly lays down that the actual cost of the block of asset (intangible block in this case) in the hands of the amalgamated company would be the written down value in the immediate preceding year. In the case of amalgamating company, if the W.D.V. of the intangible block of asset was zero in the books of the amalgamating company, the actual cost would remain zero in the hand of the amalgamated company." 3. "On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 4,62,73,763/- without appreciating the decision of the Hon'ble ITAT in the case of United Breweries Ltd. ITA No. 722/Bang/2014, 801/Bang/2014 and 1065/Bang/2014, in the order dated 30.09.2016, wherein Para-11 onwards states that SC only ruled on the issue as to whether goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature, but not whether depreciation is available on "goodwill" in case of amalgamation considering the case of CIT V/S Smiff Securities Ltd. 4. " The appellant prays that the order of the CIT(A)'s on the grounds be set aside and that of the Assessing Officer be restored. 5. The appellant craves leave to add, amend or alter all or any of the grounds of appeal which may be necessary.”
Considered the rival submissions and material placed on record, we observe that revenue is aggrieved that Ld.CIT(A) has given relief to the
7 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., assessee relying on the decision of the Hon'ble Supreme Court in the case of CIT v. SMIFS Securities Limited (supra) not appreciating the Explanation given in Explanation 7 of section 43(1) and Section 43(6)(c) and Explanation 2 of the Act and deleting the addition without appreciating the decision of the ITAT in the case of United Breweries Ltd., in ITA.No. 722/Bang/2014 dated 30.09.2016, wherein it states that Supreme Court only ruled on the issue as to whether goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature, but not whether depreciation is available on goodwill in the case of amalgamation. After considering the submissions and material on record we observe that Hon'ble Supreme Court has dealt with the issue of allowability of goodwill as under: - “It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [`Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.-- For the purposes of this sub-section, the expressions `assets' and `block of assets' shall mean—
8 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [ITAT', for short]. We see no reason to interfere with the factual finding.”
In the above decision, Hon'ble Supreme Court has dealt with the issue of generation of goodwill in the case of amalgamation of the companies and allowability of the above said goodwill within the
9 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., Explanation 3 to section 32(1) of the Act, it gave a clear finding that goodwill is an asset falling under Explanation 3 to section 32(1) of the Act and it is allowable u/s. 32(1) of the Act. Therefore, the facts in the given case also that assessee has incurred/repaid excess consideration to JSCEPL over and above the net assets acquired from them. Therefore, the facts are similar to the CIT v. SMIFS Securities Limited (supra) and the claim of the revenue that the above decision is not applicable to the facts of the case is not correct. Further, Revenue objected that the Hon'ble Supreme Court had no occasion to adjudicate upon the matter of value assigned to the goodwill and the method of computation of goodwill. We observe that the Hon'ble Supreme Court has elaborately discussed on the matter of value assigned to the goodwill and method of computation of goodwill in the order. Therefore, the claim of the Revenue is accordingly, rejected as raised in Ground No. 1.
With regard to Ground No. 2, it was argued that the Ld.CIT(A) has not considered the Explanation 7 to section 43 (1) and Explanation 2 to Section 43(6)(1) of the Act. We observe that Explanation 7 of section 43(1) and Explanation 2 to section 43(6)(1) is dealt with the issue of recording the value of assets and liability in the Books of Accounts of the amalgamated company. As per the above explanation the amalgamated
10 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., company has to record the actual cost of the transfer of capital assets to the amalgamate company, as if it would have been the assets of the amalgamated company. We observe from the record that assessee has recorded the assets and liability of the amalgamating company JSCEPL as per the directions of the Hon'ble High Court. Therefore, there is no deviation in recording the capital assets and liability of the amalgamating company in the books of accounts. The claim made by the Assessing Officer that there is no value of goodwill existed in the books of the amalgamating company, therefore assessee cannot record the goodwill in their books of accounts is not correct since the scheme of amalgamation and the terms of agreement approved by the Hon'ble High Court is being followed by the assessee and certainly there would be excess or short after settlement of purchase consideration when compared to the assets and liability acquired by the amalgamated company. When there is excess settlement over and above net assets taken over, the difference will be treated as goodwill. Therefore, this Ground No. 2 raised by the revenue is dismissed.
With regard to Ground No. 3, the Hon'ble Supreme Court has clearly given a finding that the goodwill falls in the category of intangible assets in the category of any other business or commercial rights of similar
11 ITA NO. 7675/MUM/2019 (A.Y: 2016-17) M/s. Zelle Biotechnology Pvt. Ltd., nature. Therefore, respectfully following the decision of the Hon'ble Supreme Court we are inclined to accept the findings of the Ld.CIT(A). Accordingly, Ground No. 3 raised by the revenue is dismissed.
In the result, appeal filed by the Revenue is dismissed
Order pronounced in the open court on 27th July, 2022
Sd/- Sd/- (KULDIP SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 27.07.2022 Giridhar, Sr.PS
Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum